Last October, questions about Bitcoin started flying in. “What is this Bitcoin thing? Jack just told your dad he’s made over a million dollars this year in something called Bitcoin.”
The coin had started the year around $250 only to explode to over $5,500 per coin.
Recall the Thanksgiving table.
Across the country, mom, dad, grandma and grandpa heard millennials talking about the anticipated coin revolution and how much money there was to be made. Conversations around Thanksgiving 2017 only furthered interest in this mysterious coin, helping the price jump to almost $20,000 a coin in less than a month.
A lot of people watched from the sidelines in disbelief at all the money they weren’t making.
By Christmas time, two groups had emerged; the lucky ones that got in early with stories of new-found riches, and those frustrated they missed out on this “lottery ticket.”
Fast forward to today and this October feels like deja vu.
Instead of coins, I am getting a lot of questions about Ms. Mary Jane. Pot stocks have exploded. Will we see the same type of Thanksgiving excitement? Perhaps. It is really hard to sit back and watch other people make money without itching to participate.
What should you do?
Contrary to popular opinion, I don’t discourage some speculative investing. Magic coins, the magic dragon, and picking the magic lottery numbers come with asymmetric return opportunities. Huge upside with limited downside carries an obvious attraction. Human nature pulls us toward these opportunities and begs the question, “What if?”
Picturing our new life from the most recent lottery winnings is enough to make anyone salivate – “Single ticket wins record $1.537 billion Mega Millions jackpot in South Carolina.”
The problem arises when you make these speculative bets your primary form of investing. Unfortunately, we see this happen often to people with low incomes playing the lottery – which is why the lottery is commonly criticized as a tax on the poor.
I’ve witnessed a similar mentality with new investors. Since they don’t have a significant amount of assets yet, they think they should spend what they do have on long-shots and hope for quick profits.
Take a page from the rich.
With the exception of investing in their own businesses none of the clients I’ve worked with in the upper 1% make substantial speculative investments. Typically, they allocate only 1-5% of their investable assets to these types of highly speculative bets.
Instead of hoping for long-shots to pay off, they spend an incredible amount of time and money developing skills to make themselves more marketable within their profession. This is a more reliable form of lottery ticket only with much higher odds and largely within your control.
On Twitter, James Clear, author of “Atomic Habits” started a list of investments or actions you can take that have asymmetric returns. You should check out all the great responses. Do you notice any items on the list that you can focus on?
Three I am actively working toward are:
Writing a blog (current); creating a course (coming very soon); launching a podcast (on the horizon).
If you already have wealth, it might make sense to follow the rich’s lead and allow for 1-5% of your investments to scratch the “what if” itch. But if you are a new investor, I argue your time and limited resources are far better spent developing solid long-term investments and then “speculating” on the types of ventures in the responses to Clear’s list. On top of being rewarding, the return potential is likely greater than making minor investments into obscure industries you may not fully understand.
Having room in your financial plan for minor speculative bets can be beneficial, but I would avoid going “all in” on trends, hoping to strike the lottery. Rather, invest with discipline based on your own financial goals and work on the building blocks to financial freedom. Investing in yourself to achieve asymmetric returns may make the journey shorter, and that much sweeter.